Will the iPhone ever officially make it to China? The wrangling between Apple (NSDQ: AAPL) and China Mobile, the country’s overwhelmingly dominant network operator, to launch the iPhone in the world’s largest mobile market has been long reported. Now, we’re getting a little more detail as to what the sticking points are between the two companies. According to Interfax, which cites a source at the China Mobile Research Institute quoting the carrier’s president Wang Jianzhou, the 18-month old negotiations, which included Apple CEO Steve Jobs and COO Tim Cook, broke down three times.

In the latest round—their third—the two haggled over which company would sell iPhone applications directly to customers. As it does everywhere else, Apple wanted to sell directly to consumers through its App Store. China Mobile chiefs, however, balked at this. Wang apparently considered the notion of Apple interacting and directly collecting payment from Chinese consumers as a “threat” to the operator’s dominance over the country’s mobile internet market. China Mobile has a 72 percent share of the market, or 634 million subscribers as of the end of November. In September last year, it reported it had 100 million registered users signed up to its instant messaging service, 80 million to its music service, and 40 million to its newspaper service.

“Wang said China Mobile should operate the application store itself in order to maintain its advantage,” the source told Interfax. Wang also questioned whether Chinese consumers would pay for apps with their credit card, not a payment model typically used in China, where people are more used to depositing money into their mobile account to pay for things. If this scenario went forward, China Mobile would have to have a role in selling the apps.

Photo Credit: jtbrennan

For the record, Interfax’s source confirmed the reasons why the first two attempts broke down. The first round stalled when China Mobile rejected Apple’s demand that it get a 20-30 percent cut of the revenues generated by iPhone users. That cut was standard operating procedure when Apple first launched the gadget and made exclusive pacts with carriers to sell the phone. In the second attempt, Apple offered another standard deal as its made with other carriers around the world—to sell each iPhone to China Mobile at $600 a unit, with the Chinese carrier subsidizing the handset and its service bundle. The two failed to come to an agreement, though its unclear which company was to blame.

It’s clear that Apple still wants the Chinese market, and is still trying to figure out a game plan for emerging markets. In its recent earnings call, Cook said the company was “constantly evaluating the best way to play in these markets.” He added, “We know that there’s a huge market opportunity there, and we’ll make adjustments in the future accordingly to play in a stronger way.” The iPhone has been a bit of a hit in China already. Analysts estimate some 800,000 jail-broken models are in use there already.

Could one of those ways be to offer a cheaper handset? Canaccord Adams analyst Peter Misek is predicting in his latest report that Apple will release a lower-cost handset based on the 2.5G iPhone targeted at China and India to drum up sales. The two countries might fare better with the 2.5G model as India doesn’t even have 3G networks up and running, while China Mobile’s 3G networks are built on a non-compatible technology.

But what’s also clear is China Mobile believes Apple needs them more than they need the iPhone, since in all of the negotiations Apple seems to be offering pretty much the same deal as all of the other networks its dealt with. Meanwhile, the negotiations with Apple over the App Store has now got China Mobile thinking. Interfax’s source said the carrier was “mapping out its own strategy” to offer smartphone apps.

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